After the U.S. election in November, many Africa investors became concerned that a move toward a more isolationist trade policy in the U.S. would hinder business, trade and capital flows to and from Africa. The fear was that significant U.S.-bound trade would face additional hurdles and/or taxes that would cause some of it to dry up. Aid packages were also seen to be in jeopardy. Since the administration took office, however, many of these concerns have abated. While it is still to early to see how the new administration will affect Africa, it seems that the worst fears will not be realized. The Trump administration, so far at least, seems to be pursuing a more liberal trade agenda than that espoused and supported by then-candidate Trump. For Africa this is good news, as the Continent is in need of continued trade and capital from the U.S. and its other developed-world trading partners.
In 2016, the rate of economic growth in sub-Saharan Africa hit 1.5%, its lowest level in twenty years, driven by poor performance from the commodity and energy-focused economies of South Africa, Nigeria and Angola. Because these are Africa’s largest economies, they have a large influence over the pan-Africa averages. Other countries in East and West Africa that are not as dependent on mining and energy faired much better. Outside of the three aforementioned countries, sub-Saharan Africa’s economy grew at about 4.1% in 2016, according to the World Bank—a very respectable performance. Kenya grew around 6% in 2016 and Côte d’Ivoire grew around 8%. As always, investors should remember there are many different economic drivers in the fifty-four individual African countries.
The two countries to which we continue to have the greatest exposure are South Africa and Kenya. In the quarter our South Africa holdings, as a whole, more or less held their value. The South African economy continued to benefit from the ongoing bounce in some commodity prices. However, at the end of the quarter the country created its own political and economic setback as President Zuma fired his respected Finance Minister Pravin Gordhan. The rand took a dip after this event, reversing the gains it had enjoyed versus the U.S. dollar so far in the year.
While the macro environment in Kenya remained relatively stable ahead of this summer’s elections, several of our holdings in that country declined during the quarter. The upcoming August elections seem to have relegated some investors to the sidelines, leaving stocks to drift a bit lower despite (at least for our companies) solid operational results. Our intention is to continue to put money to work in Kenya in the months leading up to the elections while prices are subdued and other investors are in wait-and-see mode. We expect the election to proceed with relative stability, and we remain hopeful that violence can be avoided. Once the election is in the rear-view mirror, we expect trading volumes to increase as investors turn their focus back to companies’ operational performance. Kenyan stocks remain good values at the moment, in our view. Longer-term, we continue to like the growth potential in Kenya and expect to continue to maintain significant investments there.
We increased our positions in the following seven equities during the quarter: Letshego (Botswana), KenolKobil (Kenya), Safaricom (Kenya), Vukile Property Fund (South Africa), Consolidated Infrastructure Group (South Africa), EOH Holdings Ltd. (South Africa) and ADvTech Ltd. (South Africa).
We added one new holding during the quarter: Fairfax Africa Holdings Corporation (FAH-U.TO). Fairfax Africa is an investment holding company created by Toronto-based Fairfax Financial Holdings Ltd., a diversified financial company listed on the Toronto Stock Exchange. Fairfax recently completed its initial public offering and received USD $500 million in commitments. The company will invest in both public and private companies in Africa with an eye toward acquiring either outright control or a significant influence over its portfolio companies. Fairfax Africa offers us some exposure to the vibrant world of private equity in Africa.
We did not liquidate any positions during the quarter.
Our position in Shoprite Holdings Ltd, the largest food retailer in Africa, helped performance in the quarter. Cape Town, South Africa-based Shoprite operates nearly 2,300 stores in 15 countries across Africa. It is now a top-five holding for us and is our single largest holding in the retail sector. In February, the company released powerful operating results that sent the stock to its all-time highs. Even though Shoprite is already the largest supermarket operator in Africa, we believe it still has plenty of room to expand as it moves into highly populated areas in the rest of Africa. Its growth rates in new markets such as Nigeria and Angola are well above the corporate average, and we think the company is very well positioned to serve the growing middle class consumer markets across Africa in the coming decades.
For our recent commentary on Shoprite, click here.
For a two-minute video clip on Shoprite, click here.
Our position in Safaricom Ltd., the largest mobile telecommunications company in Kenya, gave up some ground in the quarter. Media reports that politicians in Kenya were thinking of requiring Nairobi-based Safaricom to spin off its highly profitable and fast-growing money transfer service called M-Pesa into a separate company caused some investors to put some pressure on the stock. We viewed the price weakness as an opportunity to add to our position, and our additional investment has made Safaricom our single largest holding. We remain highly confident that both the company’s mobile data business as well as M-Pesa will continue to grow strongly over the coming years. Safaricom is now so dominant in Kenya that the main risk to the company, in our view, is increased government regulation.
We remain bullish on Africa as a whole as growth rates begin to rebound. For the last several years weak energy and commodity prices have weighed on African growth, particularly in the larger economies of South Africa, Nigeria and Angola. Now that the prices of many commodities have stabilized (and in some cases turned back up), consumer and government balance sheets have improved. It looks as though 2017 will be a year of accelerating economic growth for Africa as it bounces out of its 2016 trough.
Africa Capital Group LLC
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